Introduction
The recent financial disaster was not a natural disaster since it is something that could been prevented.
As a result of these crisis, many people lost their jobs while others lost their houses due to foreclosure.
Although the US economy is still recovering, many people are yet to recover from this crisis.
Failure to apply business ethics by those in charge government and businesses resulted to this crisis (Burden, 2010, p.385).
Those people in authority had political, ethical and social responsibilities to avert the occurrence of the crisis.
Fed failure
One of the main causes of the stormy 2008/2009 financial crisis is failure of the banking regulator to perform its regulating role. The banks and other financial institutions were permitted to choose their regulator (Chow & Foster, 2010, p.571).
Fed as the central bank of the united is entrusted with several responsibilities that would have prevented the occurrences of the stormy crisis.
One the main roles of fed is to regulate and supervise banks and other financial institutions in the country.
This would ensure soundness and safety of the national financial and banking system.
The role also ensures that the customers are protected especially on their credit rights.
It also has a duty to maintain stability of the nation’s financial system.
The fed should also contain any systematic risk that may occur in the entire financial system.
Therefore, fed can be blamed for failure to undertake its mandate that could not only save its stakeholders from losses, but also the entire nation and to some extent the global market (. Coffee, 2009, p.1)
Commercial banks
They developed a risky culture of taking more risks than before (Congdon, 2014, p.32).
They wanted to take risks in order to reap excessive returns
They thought that they would be rescued from the crisis by fed
They took exotic bets in addition to subprime residential mortgage
Non-prime commercial papers were leveraged and sold at money volatility
Government-sponsored enterprise
- They facilitated growth in debt against the law
- They charged low amount
- They thought the deal would be profitable just like the past.
- They realized the failure when it was too late (Zheng, 2014, p.1225).
Real estate
Lenders in this sector lent a lot of money to the borrowers against residential real estate.
The lending terms were too loose against the required standards (Bartolini, Bonatti & Sarracino, , 2014, p.1015)
The loan were also available to subprime borrowers who could not be able to pay.
One could easily see the bubble in the sector by 2004.
Deposit insurance
The repo market allowed runs on the bank.
Those financing securities exposed themselves to the risks (Lambert, 2011, p.249).
This could have occurred especially if the terms for lending could change against them.
They continued to invest their capital in the repo market until they were exhausted
They ended up in insolvency as the financial institutions were downgraded.
Derivates
They were not properly regulated
Ought to have been regulated by states like insurance (Jin, Bessler, & Leatham, 2006, p.40)
Failed to uphold the principle of insurable interest
Only those trades necessary economically would have been done.
Investment banks
They moved from being partnerships as they used to be.
They took too high risks
There was no anyone responsible for this too high risk
Doctrine of double liability was not upheld.
Securitization
It warped loan original incentives
It created assts that were opaque, and difficult to price and rate.
This also made it difficult for the players to recognize losses as it continued to occurs (Mulz, 2010, p.87).
The securities were either a “zonk” or “money good” in the middle of the crisis.
Critics
The crisis would have occurred despite government’s efforts to save Lehman
The bailed out/ failed or bought out institutions were already exposed to residential mortgages.
There were external pressure such as weak international financial system that were beyond those in power (Fried, 2012, p.3).
References
Bartolini, S, Bonatti, L, & Sarracino, F, 2014, The Great Recession and the bulimia of US consumers: deep causes and possible ways out, Cambridge Journal of Economics, Vol. 38 no. 5, pp.1015-1042.
Burden, JM, 2010, Regulation and recession: causes, effects, and solutions for financial crises: symposium forewordTulsa Law Review, Vol 45, p.385.
Chow, PCY & Foster, K R 2010 Liquidity traps or Minsky crises: a critical review of the recent U.S. recession and Japan's Heisei recession in the 1990s, Jouranal of Post Keynesian Economics, Vol. 32 no. 4, pp.571-590.
Coffee, JC 2009, What went wrong? An initial inquiry into the causes of the 2008 financial crisis, Journal of Corporate Law Studies, vol 9 no.1, p.1.
Congdon, T, 2014, What Were the Causes of the Great Recession? World Economics, Vol. 15 no. 2, pp.1-32.
Fried, J, 2012, Who Really Drove the Economy into the Ditch? New York, NY: Algora Publishing.
Jin, Z, Bessler, DA, Leatham, DJ 2006, Does consumer debt cause economic recession? Evidence using directed acyclic graphs, Applied Economics Letters. 6/10/, vol. 13 no. 7, pp.401-407
Lambert, T, E, 2011, Falling income and debt: comparing views of a major cause of the great recession, In: World Review of Political Economy. Summer, Vol. 2 no.2, p249.
Mulz, D, 2010, Human factor decay: the cause of the recession, Review of Human Factor Studies, Vol. 16 no. 1, pp.87-105.
Zheng, T, 2014, What caused the decrease in RevPAR during the recession? International Journal of Contemporary Hospitality Management., Vol. 26 no. 8, p1225-1242.
